The Limits of Law & Econ in IP: The Case of Digital Music

Once again, the folks at Truth on the Market have celebrated the recording industry’s efforts to assure perfect control over copyrighted content via Digital Rights Management. Free marketeers like Tyler Cowen are beginning to question DRM as a tax on consumers, and even one of the big four record companies is considering abandoning it. Untroubled by such doubts, Josh Wright and Geoff Manne push for ever more latitude for the dominant platform (iTunes) and dominant content providers (the big four recording companies).

Their posts provide classic examples of what Reza Dibadj has called the key shortcomings of conventional law & economics (L&E) reasoning. As Dibadj summarizes,

[T]hree of the most basic assumptions to the popular L&E enterprise–that people are rational, that ability to pay determines value, and that the common law is efficient–while couched in the metaphors of science, remain unsubstantiated.

Let’s take a look at how each of these assumptions drives the TOTM approach to digital music markets.

1) Robust Rationality Assumptions: Wright is very gifted at the delicate art of burden shifting. If I can’t show concrete, immediate consumer harm arising out of iTunes incompatibility, I can’t criticize it. Consumers are rational, they’ve chosen this platform, DRM and all, and who am I to butt in and interfere with this “market?” Two points in response:

a) Can Consumer Sovereignty Operate in a Cartelized Market?

Of course, we only reach Wright’s result if no attention is paid to network effects, and no one interrogates how iTunes as a platform may merely be an outgrowth of cartel power in the recording industry. There’s a deep irony that a scholar working in the field of antitrust somehow refuses to inquire whether the big four record companies engage in tacit collusion—even when every song on iTunes is sold for the same price! Why not take a look at the HHI for the industry (as I and coauthors did here), and wonder if past antitrust investigations (and at least one pro-FTC finding in the three tenors case) of dominant firms in the recording industry might might lead us to question their ability to leverage their copyrights into effective control over all manner of ancillary markets.

Of course, given the direction of antitrust law over the past twenty years, perhaps none of these activities is challengeable under it. But copyright misuse is an entirely distinct cause of action. So even competitive behavior wholly immune to challenge under the competition laws can be challenged under copyright—as Napster tried to do before it was bought by Bertelsmann (rich irony there), and as Judge Patel approved when she permitted discovery on that counterclaim in the Napster litigation.

b) Can we at least get transparency?

What’s more, the TOTMers even seem hostile to the idea of government helping to “make the market” for DRM. Consider this insight from Ellen Goodman’s exceptionally insightful piece on stealth marketing:

It seems natural that food manufacturers with a relatively good nutritional story to tell would disclose nutritional information. Kraft and Nabisco could then compete on nutritional value or Kraft could use nutritional information to distinguish its premium brands like Progresso. So one might think, and yet the market did not produce widespread disclosure of nutritional information until federal regulation required it. It was the regulation that created a market for nutritional information that now appears to be strong.

So I guess my question for Manne would be: would you at least consider regulation of DRM that made its terms and conditions very clear…and that helped consumers compare rival systems along understandable metrics?

2) Common Law as Deviation from Statute-Based Status Quo

I hate to break it to the laissez-faire crowd here, but IP isn’t exactly the best example of an untrammeled market. The MPAA and RIAA are persistently agitating for rent-seeking legislation. Is Wright against these interventions? It’s odd that regulatory activity to help make markets more friendly for consumers gets trashed immediately as inefficient, but the constant legislative ratchet upward of IP rights never seems to draw fire. Of course, James Boyle has understood this “bipolar economics” very well:

We appear to have a kind of bipolar disorder in our view of the state. When it comes to breaking up high tech monopolies through antitrust, we are deep sceptics. We point out the unanticipated consequences and deadweight losses to state intervention. We say the state is a blundering second or third best to the genius of the market, its efforts to establish limits and quotas will create a mess that even the Invisible Hand cannot sweep clean. But when it comes to setting up some of those same quotas, limits and monopolies in the first place – in this case, by overly broad intellectual property rights that clog the channels of competition and allow companies to leverage their existing property into a control over tied services – we are much more sanguine. This, after all, is “property”, not regulation. Here there seems to be an optimism about unintended consequences, a willingness to believe that vague state regulatory schemes have got it right – even when existing market leaders can twist them to prevent challenges to their position. In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about?

Note also how Wright treats the discussion of international norms or the Norwegian attack on Apple’s contrived incompatibility: stony silence. I am always astonished by free marketeers’ supine incuriosity about how other countries manage to build their digital infrastructure. Think about how the recording industry itself forced a compulsory licensing scheme on composers and lyricists. Might a South Korean-style “all you can listen to for a low-fixed-fee” model work for us? Has that destroyed the South Korean entertainment industry? On the contrary, Seoul music and movies are extraordinarily successful. How about a British style “license fee,” like the one that funds the BBC (which is now being deemed an “unfair competitor” by industry!) The orthodox L&E fetishization of complete contractual control over IP appears to be a misguided effort to apply without remainder an assumption of common law efficiency, tenuous elsewhere, to an area where it is completely unsuitable.

3) Ability to Pay: Yu’s International Take on DRM and Anticircumvention

Why is the instinctive “free market” approach to IP issues to devise strategies for dominant firms to maximize revenue? Isn’t a larger issue the fact that people are being denied access to a resource that takes zero marginal cost to reproduce? As soon as we take a broader perspective on the situation, we can see that there are several ways to define “the problem” here. A paper like Randy Picker’s “Mistrust-Based DRM” imagines a world where decentralized enforcement (including the provision of bounties) scares everyone away from sharing songs over P2P networks. This is a great solution if you define the problem as “avoiding unauthorized uses of works.” If you define the problem as persistent deprivation of culture to LDC’s, or the potential stamping out of samizdat, the problem is very different. Consider this careful analysis from Peter Yu:

[I]nstead of providing greater consumer choices and cheaper products, the widespread deployment of DRM systems will generally reduce access to materials that are needed for education, science, and cultural development.

Now, I think one could tell another story: namely, that DRM might allow companies that maximize revenue from the first world to cross-subsidize other operations and not worry so much about “squeezing blood from stones” in the LDCs (though Yu gives several reasons to discount that optimistic scenario.) But regardless of which story plays out, this has to be a major concern in normative analysis. We cannot assume that rising revenues validate a business model when it may well be built on a high margin/low volume approach (or, even worse, amounts to a one-sided privatization of a copyright law that has tried to balance public and private interests throughout its history).

All that I’ve said so far could derive from a general critique of conventional L&E’s inapplicability to IP. We haven’t even begun to address the cultural angle here. Do we want a world where large conglomerates track our every purchase, our name and serial number are burned into every digital file we buy, etc? Do we want to continue subsidizing the hegemony of the big four vis-a-vis competitors who may not be adopting DRM, or have other business models? I’ll try to address these points in posts later this week.

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